Big biopharma back in favour in the third quarter

Several large-cap drug stocks registered healthy gains across the third quarter of 2018, signalling investors' growing confidence in biopharma after a disappointing first half. 

Large biopharma benefited from a big boost in investor support in the third quarter of 2018, helping companies including Lilly, Merck & Co and Australia’s CSL to generate very respectable year-to-date gains on the stock market. 

There were notable exceptions: among the big pharma names Roche looks disappointing, with a 4% loss over the year, while Takeda shareholders have yet to come to terms with the Japanese company's takeover of Shire. Overall, however, the sector exited the third quarter in a healthier state than at the half-year stage, raising hopes that 2018 will end up strong for drug stocks. 

A look at sector-specific indices compared with broader regional benchmarks like the FTSE-100 or Dow Jones Industrial Average illustrates how well drug stocks have done. Biopharma outperformed in both Europe and the US, a notable change from the first-quarter and half-year stages, when most of the indices below registered small declines. 

In India a market correction that started in early September has dragged down most stocks, while in Japan drug makers are providing a safe haven in a rocky year. 

Stock index 9-mth change 
Nasdaq Biotechnology (US) 15%
S&P Pharmaceuticals (US)  11%
Dow Jones Pharma and Biotech (US)   11%
S&P 500 (US) 9%
DJIA (US) 7%
Dow Jones Stoxx 600 Healthcare (EU)   4%
Thomson Reuters Europe Healthcare (EU) 3%
Euro Stoxx 50 (EU) (3%)
FTSE-100 (UK) (2%)
Topix Pharmaceutical Index (Japan)  17%

Of the 11 stocks in Vantage’s big pharma universe, only Roche has registered a really notable decline over the year. Two recently launched future blockbusters – Ocrevus and Hemlibra for MS and haemophilia respectively – are apparently not enough to calm investor fears about future growth. 

Roche's performance is even more disappointing compared against those companies at the other end of the table. Lilly’s pipeline is viewed as having some of the strongest prospects in the coming years, while Merck continues to ride the immuno-oncology wave with Keytruda, which has notched up several clinical wins this year. 2022 sales forecasts for the checkpoint inhibitor have surged by 30% to $13bn, according to consensus data from EvaluatePharma.

Pfizer’s advance is also notable. The company has added almost $42bn in market value over the year, most accruing in the third quarter. Investors have perhaps been convinced that executives intend to direct the company’s substantial cash flows towards shareholder returns rather than sizeable acquisitions.

Big pharma: top risers and fallers in first 9 months of 2018
  Share price (local currency) Market capitalisation ($bn)
  9-mth chg Sep 28 ($bn) 9-mth chg ($bn)
Top 3 risers
Lilly ($) 27% 115.3 22.3
Merck & Co ($) 26% 188.7 36.9
Pfizer ($) 22% 258.3 41.8
Top 3 fallers
Roche (€) (4%) 206.4 (8.9)
Abbvie ($) (1%) 143.2 (9.7)
Johnson & Johnson ($) (1%) 370.7 (4.1)

Below the big pharma cohort, most companies were also in the black at the end of September. This group comprises 17 global drug makers that had a market cap of at least $25bn at the beginning of the year, only five of which are heading into the final quarter in the red. 

Bayer is being punished for the protracted takeover of Monsanto, which has left it open to litigation, while Takeda has failed to convince shareholders that spending $64bn on Shire was wise. Celgene, meanwhile, has not manged to stem the desertion of investor support triggered 12 months ago by a series of pipeline setbacks and concerns about future revenue growth. 

Beyond these black sheep are several companies that have rewarded investors richly over the course of 2018. 

CSL has been on an unstoppable climb over the past 12 months, buoyed by a strong performance by its hereditary angioedema drug Haegarda and growing demand for its blood plasma and intravenous immunoglobulin products. Vertex, meanwhile, has benefited from its dominance of the cystic fibrosis market.  

Most Japanese drug stocks have done well, Astellas included; its domestic peer Chugai sits just outside the top three with a 27% share price gain this year. 

The question for investors is whether this third-quarter rally will continue until the end of the year. A big sell-off in China this week triggered jitters on several global markets, and looming mid-term elections in the US could give investors another reason to stay on the sidelines. Of course, drug makers tend to benefit from their defensive qualities, so the world’s biggest biopharma groups could yet end 2018 on a high note. 

Other big drug stocks ($25bn+): top risers and fallers in first 9 months of 2018
  Share price (local currency) Market capitalisation ($bn)
  9-mth chg Sep 28 ($bn) 9-mth chg ($bn)
Top 3 risers
CSL ($) 42% 67.5 17.5
Astellas Pharma (¥) 38% 35.2 8.4
Vertex ($) 29% 49.3 11.3
Top 3 fallers
Bayer (€) (27%) 83.0 (24.3)
Takeda (¥) (24%) 34.6 (11.2)
Celgene ($) (14%) 62.9 (16.3)

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